Why Gold Prices Melt After Fed Minutes Release


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Gold prices melted to a four-month low as the greenback surged after the Federal Reserve's minutes released Wednesday afternoon reignited fears that the central bank will start scaling back economic stimulus.

The minutes from the Fed's October meeting were about as clear as mud to even CNBC's commentators. But gold's high-volume sell-off suggests investors anticipate the central bank will reduce its $85 billion monthly bond-buying spree, known as quantitative easing, sooner than later.

Spot gold prices fell 2.5% to $1,243 an ounce in New York trading.

SPDR Gold Shares ( GLD ), tracking a 10th of an ounce of bullion, sank 2% to 120.09 on the stock market today .

Market Vectors Gold Miners ETF ( GDX ) tumbled 4% to 22.85 in above-average volume. PowerShares DB U.S. Dollar Index Bullish ( UUP ), measuring the greenback against a basket of major foreign currencies, popped 0.5% to 21.82 as it snapped a three-day losing streak.

Tapering Seen In January

"Any talk of less money in the system warrants a sell-off, but gold has been weak (already) like bonds," said Fitz Garrett, president of East Shore Partners, an economic research firm in Hauppauge, N.Y. The market also undergoes tax-loss selling toward the year's end he said.

GLD has tumbled 26% year to date, while GDX has plummeted 50%. Investors don't need much of a reason to dump gold, which had already been falling this year, James Koutoulas, CEO of Typhon Capital Management in Chicago, with $50 million in assets under management, said in an email. "I'll believe the taper when I see it," he wrote.

Ryan Sweet, a director at Moody's Analytics in Westchester, Pa., expects the Fed to start tapering bond purchases in January on expectations that the economy will strengthen into next year, contingent on the job market improving.

"The Fed has signaled change is coming," Sweet said. He believes the Fed is trying to stress that although it may scale back bond purchases, it will keep interest rates low for the foreseeable future.

Fed Chairman Ben Bernanke is unlikely to enact major policy changes before stepping down this year and will leave it to Fed Chair nominee Janet Yellen next year, said Ethan Anderson, senior portfolio manager at Rehmann Financial in Grand Rapids, Mich., with $1.2 billion in assets under management. He reasons that the Fed will have to tighten the spigots soon because the Treasury will issue less debt in response to lower federal deficit spending.

"The Fed will have to taper because there may not be enough debt out there to purchase," Anderson said.

The Case For QEternity

On the other hand, critics of the Fed doubt the Fed could ever take the economy off its easy-money meds. The minute the Fed scales back its monthly bond-buying program, the stock market and housing would collapse, while interest rates and gold prices would skyrocket, said Peter Schiff, an economist and president of Euro Pacific Capital in Westport, Conn.

Not only will the Fed have to continue its stimulus program, it will have to boost the bond-buying spree to $100 billion a month to support the economic recovery, Schiff said. "They can't admit that the economy that they created is unsustainable if they taper. They have to maintain the illusion that the recovery is real."

The economy is worse off now than in September, Schiff contends, citing weak home sales and consumer confidence among other economic indicators. Existing home sales fell 3.2% in October (month-on-month) to a lower-than-expected annual rate of 5.12 million units -- their lowest level since June -- the National Association of Realtors reported Wednesday.

The consensus forecast sales to dip to 5.13 million units. Sales growth decelerated to 6% year over year as interest rates rose and the median home price climbed nearly 13% year over year to $199,500.

Consumer confidence fell to a two-year low, according to the monthly Discover U.S. Spending Monitor, released last week. A Gallup poll this month showed retailers expect flat sales this holiday season amid high unemployment and rising health care costs.

Silver Prices

Silver prices slipped 2.4% to $19.90 an ounce.

IShares Silver Trust ( SLV ) declined 2% to 19.14. It's slumped 35% this year.

Global X Silver Miners ETF ( SIL ) gave back 3% to 11.60, leaving it with a 52% loss year to date.

Follow Trang Ho on Twitter @IBD_THo .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing ETFs
Referenced Stocks: GDX , GLD , SIL , SLV , UUP

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